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End of income sprinkling will affect one in eight small-business owners: Research

26 Sep 17
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Only about one in eight small-business owners are likely to be influenced with a Liberal proposal to end earnings sprinkling, according to new study by the Canadian Centre for Policy Alternatives.

A study by the left-leaning think tank says small-business owners most likely to be influenced by the tax-savings measure are male, professionals such as doctors or lawyers who make more than $216,000 annually and with spouses or adult children that do not work. Ending income sprinkling is one of three taxation changes that the Liberal government is contemplating.

Business lobby groups have fought with the changes, saying they’ll discourage Canadians from starting their own ventures.

However, David Macdonald, senior economist of the center and author of the research, stated family-run businesses such as restaurants or shops are unlikely to be affected.

“It’s hypothetically possible this [change] could impact a middle-class household, but in the real world it is very unlikely,” Mr. Macdonald said.

His research suggests 77 percent of small-business owners don’t benefit from the tax break, while another 10 percent would not gain enough to offset the price of setting up the scheme.

About half of the yearly value of this tax break goes to households in the top 5 percent of earners, the analysis states.

Income sprinkling enables the owner of a private company to distribute dividends to relatives, even if they have not contributed to company operations. If the owner is at a high-income tax bracket and the relative is in a lower range, the sprinkling will have an overall effect of lowering the taxes paid.

In July, the Liberal government proposed ending the practice, together with changing the rules for investing inside a company and the tax treatment of capital gains. The authorities said the measures were developed to target Canadians with high incomes.

The CCPA study looked only at the effects of income {}. But business groups have been fighting all of the changes.

“These are valid ways of small business owners to grow their business, ensure the stability of the company during uncertain times, or to save for the retirement. Without these measures, companies won’t have the ability to create as many jobs for Canadians,” said Dan Kelly, president of the Canadian Federation of Independent Business, in a statement last week.

The Canadian Medical Association has also defended income {}, saying it is a way for physicians with private corporations to look after their loved ones.

Mr. Macdonald said that his analysis, based on data from Statistics Canada and tax filers, revealed income sprinkling was nearly entirely benefiting wealthy Canadians. And business owners who benefit from the tax measure save less than $10,000 per year.

“It is interesting to observe the examples which were brought out. It is certainly possible to make accounting cases or an Excel instance where a family … would see their taxes go up $20,000 due to the closure of the tax loophole,” Mr. Macdonald said. “But there are not really plenty of families that fall in that in the broad scheme of things.”

In his analysis, Mr. Macdonald estimated that the federal government would collect about $280-million more in taxes annually if income sprinkling is finished. Provincial authorities would collect about $110-million annually.

Courtesy: The Globe And Mail

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